Custodia Bank (“Custodia”) has filed a lawsuit against the Federal Reserve Board (“FRB”) and the Federal Reserve Bank of Kansas City (“FRBKC”) in federal court in Wyoming alleging that the FRB and FRBKC unlawfully refuse to act on master account requests. A Federal Reserve Master Account allows banks to directly access the Federal Reserve and use the payment, clearing, and settlement services of the Federal Reserve System.
Custodia is a Wyoming-chartered Special Purpose Depository Institution (“SPDI”), which is a relatively new charter designed for institutions focused on digital assets. A Wyoming SPDI may accept deposits and perform custodial, asset management, fiduciary asset management, and related activities, but is generally prohibited from making loans with customer deposits in fiat currency. A SPDI is not required to obtain FDIC deposit insurance, but may do so.
Custodia wants to get a primary account to eliminate the costs of using an intermediary bank to access Federal Reserve services. In its complaint, Custodia claims that because it is eligible for federal deposit insurance, it is eligible for a primary account. Custodia filed its main account application with the FRBKC on October 29, 2020. The complaint asserts that federal bank agencies are required by law to make a final decision on an application within one year (12 USC § 4807) and the standard FRB form the agreement states that processing may take 5-7 business days. Custodia alleges the delay led it to launch its products using correspondent banking, which it says is a “decidedly second-best and much more expensive option” and “eliminates much of the competitive advantage.” of the SPDI charter.
Custodia asks the Court to declare the delay unlawful and to order the FRB and FRBKC to process and adjudicate on the main account application within 30 days and, if Custodia’s application is denied, to further declare that the FRB and the FRBKC have a legal obligation to provide Custodia with a main Account.
Access to master accounts has become a hot issue. This is not the first time the FRB has been sued over access to the main account. A credit union set up to serve marijuana-related businesses sued the FRBKC when it was denied a lead account. The opinion of one of three judges on a 10th Circuit panel said the credit union was entitled to a master account. Additionally, in 2018, TNB USA Inc. sued the Federal Reserve Bank of New York, alleging that it had been unlawfully prevented from opening a primary account. The request was rejected because no official denial had been given. In 2021, the Federal Reserve released proposed guidelines, which it later supplemented, for evaluating account applications.
In addition, the Lummis-Gillibrand Responsible Financial Innovation Act, introduced on June 7, 2022, includes a provision stating that any state-chartered depository institution is entitled to an account at a Federal Reserve bank, which the institution either federally insured or supervised.
Copyright 2022 K&L GatesNational Law Review, Volume XII, Number 161